Potential for Shale Gas in Georgia:

Potential for Shale Gas in Georgia: Preliminary Study for Feasibility Analysis of Shale Gas Exploration in Georgia Prepared for: AEAI under Grant Agreement #ECI GA R2 48 Georgia Energy Capacity Initiative USAID Contract No. DOT I 00 04 00022 00 By: World Experience for Georgia www.weg.ge September, 2010

World Experience for Georgia (WEG) conducted a preliminary study for feasibility analysis of shale gas exploration in Georgia for USAID under the Georgia Energy Capacity Initiative Contract No. DOT I 00 04 00022 00 (WEG Grant Agreement #ECI GA R2 48). This report was prepared for the benefit of USAID Georgia and provides the results of our study in fulfillment of our agreement. The overall goal of the project was to evaluate on a high level the existence and potential for development of shale gas resources in Georgia. The authors views expressed in this publication do not necessarily reflect the views of the United States Agency for International Development or the United States WEG www.weg.ge Page 1 of 11

EXECUTIVE SUMMARY Georgia is an oil and gas transit Country with limited fossil fuel resources. The primary gas supply to Georgia comes from transit fees from the South Caucasian Pipeline and gas Russia to Armenia transit over North South natural gas pipeline supplemented by purchases from Azerbaijan and less from Russia. Domestic natural gas supply is highly important to energy independence, security and sustainability of Georgia. An exciting new oil and gas exploration frontier of the 21 st Century Shale Gas can be a chance for Georgia to drastically improve its energy security standing. World Experience for Georgia (WEG) has applied for a grant to conduct a Preliminary Study for Feasibility Analysis of Shale Gas Exploration in Georgia for USAID under the Georgia Energy Capacity Initiative Grant program conducted by AEAI. The application was considered by AEAI and contract No. DOT I 00 04 00022 00 (WEG Grant Agreement #ECI GA R2 48) was awarded. This report was prepared for the benefit of USAID Georgia and provides the results of our study in fulfillment of our agreement. The overall goal of the project was to evaluate on a high level the existence and potential for development of shale gas resources in Georgia. The Government of Georgia has decided to study the prospects of developing shale gas production in the country. The principle objectives for developing shale gas are: 1. Increase energy security and sustainability of Georgia in long term, 2. Reduce the energy costs to Georgian population and economy, 3. Achieve maximum economic benefits from developing the indigenous mineral resource in Georgia World Experience for Georgia (WEG) has conducted a preliminary feasibility analysis of shale gas exploration in Georgia. The study identified four primary candidate Gas Shale formations in Georgia: a. Upper Miocene (Sarmatian) b. Oligocene Lower Miocene (Maikopian) c. Middle Jurassic (Aalenian Bathonian) d. Lower Jurassic (Liassic) These prospective Gas Shale formations are geographically located both within current Oil and Gas License Blocks as well as outside, on relatively less explored territories. They vary in their geographic spread as well as depths, thickness and the level of knowledge of their properties. Although there have been numerous gas shows recorded from these formations, there is insufficient information to assess the gas in place and economic viability of its development. Very rough estimates of total potentially gas bearing shales indicate that in case of success the potential gas resource can be comparable to that of some most productive shale gas plays in the USA.

WEG classified the potential of Georgian Gas Shales as considerable with additional research required to prove gas resources. Further research, geological and reservoir data acquisition and analysis are needed to confirm the technical recoverable potential of gas shales. In addition market regulatory and infrastructure reviews are needed in order to verify economic viability of developing Shale Gas in Georgia. At the moment there is insufficient information to assess the recoverable gas reserves however preliminary rough estimates indicate that in case of success Georgia s shale gas potential can be comparable to most successful shale gas plays in the US. Table 1 below compares the known properties of the four formations in Georgia. Page 3 of 11

Table 1. Comparative Table of Identified Potential Gas Shale Formations in Georgia Shale Formation Upper Miocene (Sarmatian) Oligocene Lower Miocene (Maikopian) Middle Jurassic Aalenian Bathonian Lower Jurassic (Liassic) Depth min/max Thickness min/max Maturity Distribution Tectonics Lithology Gas & Oil Shows 0/3,000 300/3,000 matured Zonal in: Kartli and South Kakheti, Guria and Abkhazeti Samegrelo, OGZs; local in Rioni and Near Tbilisi OGZs Low sandy clay sediments with interlayers of conglomerates and oolithic limestones 0/>5,000 700/2,500 matured Regional Intermediate clays (shales) and sandy clays sediments 0/>9,000 400/1,300 matured Regional Tectonized with vertical and overturned folding, overthrusts bedding and thrust faults 0/>10,00 0 200/1,500 maturedovermatured Regional Same as above but more tectonized alternation of shales and sandstones shales and slates with interlayers of sandstones and rear interlayers of limestones Oil shows Oil & Gas shows Oil Oil shows, bitum en Level of knowledge Intermediate Good Poor intermediate Poor intermediate Notes : 1. The Table contains only those identified shale formations with considerable areal extent and thicknesses allowing to consider them as primary targets for feasibility study. 2. Maturity (not to mix with oil maturity) implies the degree of diagenesis undergone by formations with respect being favorable for the Natural gas generation. 3. The Tectonics is a cumulative magnitude (range) of general folding, faulting affecting spatial traceability of the formation. 4. Because of technical and other reasons gas shows have not always been documented during the drilling process. 5. The Level of Knowledge implies accumulated set of information about general geological features like lithology, mineralogy, petro mechanics, in situ pressures, etc.) Page 4 of 11

Figure 1. Geologic Map of Georgia Showing Liassic formations. Figure 2. Geologic Map of Georgia Showing Areal Distribution of Middle Jurassic Formations. Page 5 of 11

Figure 3 Geologic Map of Georgia Showing Areal Distribution of Maikopian Series Figure 4. Geological Map of the Upper Miocene (Sarmatian) Formations. Page 6 of 11

Main Conclusions Our Study has lead to the following main conclusions: 1. The capacity of Georgian sedimentary section to generate hydrocarbons is apparent from the occurrence of oil and gas fields, subsurface oil and gas shows, surface oil seeps, and analyses of organic matter from potential source rocks. 2. The primary candidate Gas Shale formations in Georgia are: a. Upper Miocene (Sarmatian) b. Oligocene Lower Miocene (Maikopian) c. Middle Jurassic Aalenian Bathonia age shale sediments d. Lower Jurassic (Liassic) These sediments are present at varying depths over the northern and eastern one third of Georgia. 3. The Sarmatian, Maikopian, and Liassic are known to be kerogen rich from surface oil seeps and oil and gas shows in wells. The Aalenian Bathonian age shale sediments show evidence of oil and gas in well logs. The thermal maturity within these formations tends toward oil versus natural gas and is favorable for shale gas. 4. The resource potential of Georgian Shale Gas can be classified as considerable and is adequate to recommend implementing a Discovery Stage I assessment of Shale Gas in Georgia. 5. There is a host of geology information accumulated in different times at different institutions that needs to be consolidated and digitized for narrowing the range of shale gas exploration. 6. Numerous gas shows reported by various license block owners and from earlier periods, indicate a high probability of gas presence in these shale formations. As in many cases the main concern is the potential scale and the cost of its production. 7. Georgia is located in a gas rich neighborhood and there is no liquid gas market for shale gas. A wise long term marketing and promotion strategy will be needed for domestic gas to successfully compete with the traditional gas from neighboring countries on internal, regional and potentially international markets. 8. There is insufficient motivation for license block owners to develop traditional or non traditional shale gas exploration and production. Additional market incentives and/or regulatory support mechanism, access to gas pipelines and other means of motivation should be considered. 9. A comprehensive gas strategy needs to be developed along with shale gas exploration in order to guide the government actions for promotion of domestic gas resources. Page 7 of 11

Feasibility Study for Shale Gas Production in Georgia Development of Shale Gas production is faced with the challenges posed by extraordinary exploration, drilling and production measures required by this nontraditional resource and relatively high cost resulting in higher sensitivity to market conditions. Success in this task is related to successful resolution of a number of problems including: o Identification and Characterization of Shale Gas Resources, o Understanding of Prospective Reservoirs, o Development of Drilling and Completion Strategy, o Creation of Favorable Market and Regulatory Conditions, o Infrastructure Development and Access, o Environmental Compliance and safe water management. In order to successfully address these challenges, a feasibility study is needed to identify the most practical options for developing shale gas production in Georgia including technical, economic, socio political, legal and regulatory, environmental and infrastructure factors into consideration. The specific objectives of the feasibility study shall include: 1. Verify the existence of commercially viable quantities of shale gas in Georgia, 2. Assess the resource of shale gas estimate the quantity and its areal and geologic spread, 3. Estimate the possible costs and volumes of production under (at least) two different scenarios, 4. Assess the potential market for Georgian shale gas and recommend market strategy, 5. Evaluate gas infrastructure and its development needs, 6. Recommend to the government the optimal approach and action plan for developing the shale gas production and utilization in Georgia. The study shall be targeted to identifying the prospects of sustainable and economically beneficial production of shale gas in Georgia. The results of Stage I studies should provide sufficient evidence for the government and existing or potential investors to make informed decisions on further actions and should provide sound common grounds for cooperation between them. Having in mind the limited resources that can be available for research, the study, based on available information and expert knowledge is to be aimed at maximization of potential economic benefit to Georgia, versus academic interest. The study should prepare the grounds for Stage II actual development of Shale Gas Plays and stimulate investment from existing license block owners and new potential investors. Page 8 of 11

Scope of Work for Stage 1 Shale Gas Resource Development Study The scope of work (SoW) for this study is specific to Stage I Shale Gas Play Discovery work activities and also addresses the issues defining the feasibility of its development. The study is to be conducted in consecutive tasks leading to an assessment of the economic potential of Shale Gas development in Georgia. The specific Tasks to complete this study is as follows: Task 1. Develop a Central & Unified Geological Data Base for Georgia Shale Gas Deposits Task 2. Shale Gas Exploratory Geology Analysis with License Block Operators As a result of these activities all available surface and subsurface geological data in Georgia pertaining to prospective gas shales will be collected, cataloged and inputted into a Geological GIS data base system, subsurface geological framework model of Georgia shall be developed and Shale Gas deposits identified, gaps in data needed to evaluate the resource potential of Shale Gas deposits will be determined. Task 3. Geological Framework Model of Shale Gas in Georgia The objective of this investigation is to develop, based on all collected data, a geological framework model showing the depth, thickness, and areal extent of identified Gas Shale formations for the various regions of Georgia. It should also include a characterization of the formations in terms of rock type, reservoir rock properties (mineralogy, TOC, petrophysics), and presence of oil and gas. Field exploration (sampling and lab analyses Average 5 samples per formation type) will be conducted as a part of this task. Task 4. Gas Market, Regulatory and Infrastructure Review The perspectives of Shale Gas drastically depend on the market conditions and all factors affecting the cost of production. The objective of this review is to assess the potential market for Georgian SG including domestic, regional and international perspectives, to assess the regulatory and legal framework for shale gas developers and to assess availability and adequateness of infrastructure and other conditions relevant to Shale Gas development in Georgia. Tasks 5 6. Shale Gas Resource Screening and Ranking Analysis, Geophysical Surveys of Candidate Shale Gas Play Areas The screening, ranking, and selection of candidate Shale Gas play, Define Candidate(s) Shale Gas Play Study Area, Perform Geophysical Survey and Analyze Results to prepare for exploratory drilling. Task 7. Exploratory Test Drilling and Geological Data Analysis Page 9 of 11

The objective of this Task is to drill an exploratory test hole and collect geological data on one of the primary candidate Shale Gas plays. The goal of the test well(s) is to 1) determine oil and gas reserves, 2) design and optimize a reservoir drainage program, 3) resolve potential technical issues, such as hydraulic rock fracturing methods and equipment requirements. Task 8. Shale Gas Action Plan The objective of this task is, to develop the recommendations and plans for further actions for the Government of Georgia to facilitate investment in shale gas development in Georgia. The task consists of several subtasks: Stage 2: a. Shale Gas Drilling and reservoir Evaluation Program, b. Shale Gas Market Development Recommendations, c. Risk Management Plan. The total estimated cost to complete this Stage I Shale Gas Feasibility Analysis is $2.78M and the estimated duration is 16 months. Page 10 of 11